Over the last few years I’ve read a number of books on stock trading but despite this I never really felt compelled to risk any of my own money on the markets.
Then in October I discovered that spread betting offers a cheap way to test the water on a small budget. Spread betting on markets is treated as gambling by uk laws and so there’s no stamp duty or capital gains tax to pay. Also the competition between firms is enough that pretty much all of them provide £1 per point betting on the major stocks and indices. Competition keeps the spreads narrow too - usually less than 1%.
Finally a lot of the firms offer a period of training where for a few weeks you can put on bets at 10 or 20p a point with guaranteed stops, which means it’s feasible to be putting £3-£6 total risk on each trade, especially for stocks priced under 500p.
I got started with IGIndex, which provides an impressive range of uk stocks including all of the ftse 100 and 250. The online web software is really very good: the trading platform is totally ajax using yahoo YUI libraries. Unfortunately the charting stuff is a java applet, but that appears to be par for the course with spread betting platforms.
I funded the account with £100 of risk capital and started betting. As an employee of an investment bank I need to get clearance for each stock from our compliance dept, but this turned out to be not as onerous as it sounds. Anyway, I had the misfortune of my first trade in october winning big: a £6 short bet on the ftse100 index at 10p a point. I trailed a stop and made £30 before the trade was stopped out. 30% appreciation in capital in one trade!
Of course this was pure fluke but it made me over confident and I quickly lost almost everything over the next 3 weeks: I got down from £130 to about £35. This was exactly what I needed: in my opinion you want to lose big during the training period when your capital exposure is small. During this first month I learnt a bunch of things:
- Money management and risk management are really important!
I suspect this is more important than stock picking skills. Trading is a probabilistic thing and so you have to expect to lose a (maybe large) percentage of trades. For example I currently get stopped out on approximately two thirds of my trades. Apportioning risk capital between trades and using calculated stops ensures that a run of bad trades doesn’t destroy your capital account and allows you to stop and re-consider.
- I was confusing short term oscillations with trends
I did this quite a bit in the first few trades, and the lesson is: always look at longer term graphs for overall patterns. My trades usually last a couple of weeks when they don’t get stopped out. This means I need to look at charts over a year to check for trends.
- Plan the trade, trade the plan
I’ve discovered that trading can be a stressful affair and it’s easy to make silly mistakes in front of the 5 minute charts. I suspect this is because for a beginner like me there’s a big perception of time pressure, and also because you’re always in a position to do something with your stocks which makes it difficult look away.
To mitigate the background stress and the opportunity for mistakes I’ve found it much better to make plans when the markets are closed (e.g. in the evening or weekend) and not in my lunch break. This is one reason I prefer to trade uk stocks which trade during the day rather than e.g. forex or commodities which are trading all the time.
For the stocks I have open at a point in time I make notes about what I expect to happen and what to do if it does or doesn’t happen. IG index offers an SMS alert service which I use to alert me of price breaks. The alerts and the written plan keep me from worrying about my stocks while I’m working.
- record everything
This is super important! I keep a spreadsheet of trades, a diary of notes about each entry/exit and screenshots of the intraday charts. This was especially important during the early weeks as I was able to learn from the many beginner mistakes I made. A couple of months later and I’m still making plenty of mistakes that I can learn from and I don’t expect that to change any time soon.
I’m out of the training period at IGIndex now and so am betting £1 a point on uk stocks and I’m currently apportioning a maximum risk of £20 per trade. I’m starting to become more consistent and confident but I’m wary that it’s difficult to tell at this early stage whether this is more luck or skill. If you’re thinking about trying your hand at trading I’d definitely recommend spread betting as a first step before committing any real money to the markets.